X factor in Musk cocktail: AI synergies are real, but the proposed SpaceX-Tesla merger has red flags for shareholders

In mythology, devas and asuras churned the cosmic ocean for amrit, the nectar of immortality. First came halahal, a deadly poison, which Shiv swallowed. When the pot of amrit finally emerged, Vishnu, disguised as a beautiful woman Mohini, took charge of the pot and chose who would drink from it. Dazzled, the asuras never checked who was pouring.

Elon Musk has begun a churning of his own. Earlier this month, a Tesla Roadster flipped through the air on SpaceX thrusters. Five days later, the two firms formed independent committees to study a possible merger.

SpaceX is valued at $2.1 tn, Tesla at $1.5 tn. A decade ago, Musk called their ties 'tenuous'. Now he sees 'merit'. What changed? Two letters: AI.


Both firms are ravenous for chips and are co-building Terafab that could cost $119 bn. Musk says Tesla's AI chips will cost a tenth as much as Nvidia's. Tesla's robotaxis and robots would form the body of 'physical AI', with SpaceX's satellites and data centres as its brain. Markets cheered: SpaceX rose 8% and Tesla 3%, adding $200 bn to their combined market value.

The nectar is real. But so is the poison:

Price pain: Tesla earned $3.2 bn over the past 4 quarters. Add a 30% takeover premium, the highest RBC Capital Markets has modelled, and SpaceX would pay nearly $2 tn in its own shares - about $600 for every $1 of Tesla profit, almost doubling SpaceX's share count. The market is not pricing a merger but a rescue.

The rescuer is hungry too. In 9 mths, SpaceX generated $13 bn in operating cash, but spent $48 bn on capex, with another $35-40 bn planned for Q4. Tesla has trimmed this year's capex to $20 bn, but says spending on robotaxis, robots and AI computing will climb for years.

Even last quarter's $1.5 bn free cash flow came from delaying supplier payments. Strip out that working capital boost and Tesla burnt about $1 bn. Together, the two could spend $45 bn on capex this quarter, with Musk effectively on both sides of the till.

Synergies need no wedding: Terafab is a joint project. Tesla booked $430 mn in sales to xAI last year, mostly Megapack batteries, and $143 mn to SpaceX, mostly Cybertrucks. It has also invested $2 bn in xAI, a stake that became SpaceX shares. You don't need a wedding to share a kitchen.

Ronald Coase argued in 1937 that firms exist because markets can be costly to use. Here, the market works: every battery and truck sold between the firms has a price that Tesla's audit committee must defend as an arm's-length transaction. A merger erases that price - and a rare outside check on Musk's judgement.

Kautilya warned in the Arthashastra that spotting an official dipping into funds is as hard as telling when a fish underwater is drinking. Merged books spanning rockets, robots, chatbots and a social network would make scrutiny harder still.

Mohini holds the pot: Musk owns about a fifth of Tesla, but controls 82% of SpaceX's votes through super-voting shares. At current valuations, Barclays estimates a merger would give him 37% of the shares and 56% of the votes, before any premium.

The special committees are meant to protect outside shareholders. But who guards the guards? Their membership remains undisclosed, and apart from Musk and his brother Kimbal, venture capitalist and Tesla director Ira Ehrenpreis also sits on SpaceX's board.

Majority of all Tesla shares must approve the deal, including Musk's fifth, leaving him needing fewer than 2 in 5 of the remaining votes. Tesla, now incorporated in Texas, also restricts derivative suits to shareholders with at least 3% of its stock - a threshold only 4 investors, including Musk, appeared to meet at last count.

Musk's public endorsement had reportedly made 'a mess' of the process. It recalls SolarCity, his cousins' firm, which Tesla bought in 2016 in a process a Delaware judge called 'far from perfect', partly because Musk never properly stepped aside. And, in a takeover, his Tesla pay deal ($824 bn after dilution) waives many operational targets and pays out on the deal price or Tesla's pre-deal value, whichever is higher.

Two priests and a funeral? China accounted for 22% of Tesla's revenue last year. Its Shanghai factory delivered more than half its cars. SpaceX, meanwhile, builds US military satellites and won $6.5 bn in missile-shield contracts in May.

Beijing will baulk at a Pentagon supplier owning factories that collect Chinese drivers' data. Washington may object to the reverse. Tesla may have to ring-fence its China business. If Democrats gain ground in next week's midterms, Washington may be less obliging. A deal needing both Beijing's and Washington's blessings is a political bet, not an industrial one.

If gains come without a merger and bear only costs with it, the deal is not about synergy. A vote by Tesla shareholders other than Musk - a 'majority of the minority' - and a scrapped pay clause might change that verdict.

Musk says he feels as if he is 'tap dancing through a minefield'. The mines are under shareholders' feet. The asuras lost out on the amrit because they let Mohini do the pouring. Tesla shareholders should insist on holding the pot.